Padding the Runway benefits European equity markets

On the February 7,  1992 The Treaty on European Union was signed in Maastricht Netherlands with the express intent of achieving a complete Union of European states – socially, monetarily and on foreign policy.

This treaty, a follow-on iteration of the Treaty of Single European Act of February 1986 and the Treaty of Rome on January 1, 1958 attempts to deal with an issue that has long plagued the Bloody Continent.

The FUNDAMENTAL reason behind the unification of Europe is an overriding desire to AVOID another World War on European soil. Fast forward to present day, and given Germany’s dominance within the Union, we would dare to say that Europe has had to accede to German dominance albeit through peaceful means.

Therefore when we consider European economics we should always view it through the lens of a Union that is created – not for profit motive but to peacefully pacify German aggression! Which is why European economics always appears alien to capitalist Americans?

Seen as though the news flow this week will be dominated by the ECB and their QE program we will focus on Europe.

Bernard Baruch quotes

At this time it is a forgone conclusion that the ECB will be ‘padding the runway’ with a QE program that is aimed at:

  • Stimulating Growth in the European Union
  • Avoiding any sovereign default;
  • Avoiding an exit of any country from the Union namely Greece
    (remember Rule #1 pacify Europe under German rule)
  • Avoiding a contagion either politically or financially AND preventing an outright deflationary spiral

Speculation therefore abounds as to what the QE will look like and how big it will be.

The recent severance of the Swiss Franc (SF) peg to the Euro has stirred speculation that the QE program will be BIGGER than expected and that the Euro will fall even further – the prospect of an even weaker SF is one the Swiss neither need nor desire. [GS: An observation – we have noticed negative news such as this can mark the end of a trend for a market that has been trending in one direction – down – for an extended period of time.]

In the esteemed words of famous speculator Bernard Baruch, let’s look at the charts to see what the news could be:

european-equity-markets

The above chart shows US equities versus European equities – green line – European equities have been underperforming US equities. The black line is the inverse of the Dollar Index (of which the Euro is a major component) – hence when the Dollar is getting stronger (Euro weaker) US equities have outperformed their European counterparts.

Of interest is therefore the red circle where European equities have begun to outperform US equities. We have no way of knowing if this nascent trend will continue but this reversal has occurred in close proximity to the Jan 22nd ECB meeting. Whatever news emerges from Europe will likely be interpreted as GOOD for the Euro and European equities versus US equities.

We await to see whether “Life imitates Art far more than Art imitates Life” – Oscar Wild.

Best Regards

Greg
Greg Silberman CFA®, CAIA, CA(SA)

Chief Investment Officer

 Advisory Services offered through Atlanta Capital Group.

Securities offered through Triad Advisors, Member FINRA / SIPC.

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